The unexpected champion

You don’t become a growth champion by accident. Poland has clearly done something right to see 26 years of continued growth. The success story of the entire CEE region post-1989 offers a number of lessons for other countries worldwide. The question they now need to answer is how to continue to converge, and when do wealth disparities become a real problem? WBJ talked to Marcin Piatkowski, a Visiting Scholar at Harvard University and the author of the recently published book on “Europe’s Growth Champion: Insights from the Economic Rise of Poland” about what it takes to overcome a thousand years of bad luck.

Interview by Beata Socha and Morten Lindholm


WBJ: How did you get the idea for the book?

Marcin Piatkowski: I wrote the book to highlight the economic miracle that few people have heard about. We always hear the same success stories of Asian Tigers – South Korea, Singapore or Taiwan – but hardly anyone mentions the success of Poland, even though over the last quarter of the century it has become the growth champion of Europe and the fastest growing economy in the world among countries with a similar level of income. Its economy has now entered the 26th year of uninterrupted economic growth, the longest in Europe’s recent history and one of the longest economic expansions in the world (longer than Japan’s or South Korea’s). Yet somehow no one wrote about it before. This story just needed to be told.

I also wanted to explain where this miracle came from. Poles now have a higher income and a better quality of life than ever before. They live during the country’s new Golden Age. You may wonder how it happened, especially since Poland has been economically unlucky for a thousand years: always backward, underdeveloped, and at least a few steps behind the West. The country has undertaken numerous attempts to catch up with the West: in the 19th century, in the interwar period and later also under communism – all unsuccessful. Why is it catching up now? And most importantly: what lessons can be learnt from that? Other than a few publications for academics, no book geared towards the global audience has tried to explain it. It’s true that not every country can become an EU member, a critical part of Poland’s success story, but even countries such as Colombia, Brazil, Thailand and Malaysia can draw useful developmental lessons from Poland’s recent history.

Finally, there is another question that needed answering: what can Poland and other CEE countries do now to continue converging with the West? Poland has already covered two-thirds of the gap, but now comes the hardest part.

What factors were responsible for making Poland a “growth champion”?

Most books and reports have so far have focused on the choice of economic policies that made Poland more successful than others. But if good economic policies drove the economic success, then what drove the economic policies? Few authors have dared to describe it. This is what I try to do in the book: I look at meta-sources of growth – institutions, culture, ideas and leaders – to explain why Poland became so successful. The reason why some countries are rich and others are poor is not because there is not enough knowledge of what to do – every policymaker today anywhere in the world has access to unlimited knowledge of what good economic policies look like – but the key question is why some countries decide to adopt such good economic policies and others do not.

I focus on five main reasons for why Poland wanted to adopt good economic policies. First, it was the post-communist legacy of social egalitarianism and high social mobility, which did not exist before 1939, that helped Poland build an open and democratic state for the first time in its history. Second, a strong social consensus helped adopt Western institutions, which supported the success.

Third, Poland finally had a lucky break as Western Europe was open to embrace it and send euros instead of tanks. Fourth, the emergence of a new middle class and a new business elite was also key, as it created social and political pressure to adopt good policies.

Finally, Poland was governed by high-quality policy making elites. This may sound strange, when everyone likes to complain about politicians, but it is nonetheless true when juxtaposed against other countries in the region and beyond. Poland and Hungary were the only countries in the Eastern bloc that enjoyed a large scope of freedom that allowed alternative elites to emerge. When the change came in 1989, Poland had an alternative elite that came in and hit the ground running the next day. Thanks to their education and experience abroad, they knew what they were doing. That was not the case in Romania, Bulgaria or the former Czechoslovakia, because they were much more closed off from the West. Virtually every Polish minister of finance had spent considerable time abroad. Balcerowicz, Kołodko and Belka all studied in the West on Fulbright scholarships. In Bulgaria, on the other hand, until 2002 not one of its ministers of finance even spoke English. Strong policy makers set the stage early on for Poland’s success. Robust political competition, which put a premium on good economic policy making, transparent privatization, and strong institutions, shepherded the process since then.

How was it that Poland’s privatization was more transparent than elsewhere in the post-Soviet bloc?

Poland was lucky because its privatization process was delayed. Large scale privatization started only in 1996, due to strong political and social opposition. By then, civil society, mass media and newly emerged institutions were strong enough to ensure that the process was much more transparent than in other countries. It wasn’t anyone’s strategy to delay the process, but it turned out to Poland’s benefit. Haste makes waste.

In Russia and Ukraine the privatization process created a class of oligarchs. In the Czech Republic, the so-called “kuponovka,” i.e. mass privatization, did not produce much of an economic benefit. Poland ended up being practically the only economy where privatization did not produce oligarchs. (With tongue-in-cheek), this is well reflected in the poor performance of Polish football teams. They all do badly because there are no billionaires that could invest in top-quality teams and afford to buy expensive players. But I’d rather have underperforming football teams than an underperforming economy.

Are there any other reasons why Poland has managed to stay ahead of the curve?

There are many. Let’s take the banking sector, for example. Poland is the only transition economy that has not had a banking crisis since 1989. That is testament to the quality of elites and to the quality of banking supervision. Polish taxpayers have never had to pay a single złoty to support the banks. All the other countries in the region have suffered several banking crises over the past 26 years.

 

Allowing banks too much liberty is risky. Banks are like fire: they are indispensable to daily life of the economy, but when left uncontrolled they can burn down your house. The banking sector is too prone to explode and take down the whole economy with it. It’s foolish, for instance, to lower the loan-to-value ratio because it can add 0.1 point to your economic growth for three years, if after that a crisis hits and you lose 10 percent of your GDP. The banking sector needs to focus on playing its fundamental role of transferring savings to investors, which is where it provides the most social value, and not much more. All the derivatives and complex instruments are just gambling; a distraction from the core role the system should play in the society. Sustaining strong financial supervision is a vital component of the new growth model – “The Warsaw Consensus” – which I propose in the book.

Do you expect the current growth to wind down? Do you think the end of the current business cycle is near?

I am far from being a pessimist. For 26 years, year after year, many economists have been forecasting a crisis in Poland, but they have always been wrong (which somehow does not stop them from projecting that another crisis is just around the corner, that Poland is on the way to becoming the next Greece or whatever other catastrophe is currently in vogue). Cassandric projections will always sell well and they know it.

 

Back in 1989, when Poland transformed into a democratic capitalist state, no global experts would put any money on Poland. They would bet on the Czechs, because they were so well organized, or on Hungarians, because they implemented thorough reforms before 1989 and were the West’s darlings. But no one bet on Poland. But it was Poland that got most of the things right and beat others. I even considered an alternative title for my book: “The Unexpected Champion” as the testament to Poland’s success that no one could predict.

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hat do we need to do to make sure the Polish miracle continues?

Poland has managed to create a truly egalitarian, open and inclusive society that it never had before. This should help keep the growth going, at least still for some time. I show in the book that among around 44 high-income countries in the world today (outside oil-rich economies), virtually all of them are inclusive: they all democratic and maintain low or moderate levels of inequality. Inclusive societies are ruled by many for the benefit of many. However, poor countries are predominantly extractive, as they are ruled by the few for the benefit of the few. It is very difficult to become inclusive –violence in one form or another is needed to eliminate the old, extractive systems and redistribute economic and political power among the whole society. But once it happens it is hard to ever become extractive again. I think Poland will remain inclusive and continue to grow.

But this may change if inequality gets out of hand. So far so good, as inequality in Poland today is roughly at the same level as for the European Union as a whole. But there is a risk that inequality may grow, as the newly emerged elites will multiple their wealth at a faster rate than the rest of the society – Piketty [a French economist – ed.] rightly points out that returns on capital are higher than increase in wages – and re-create an oligarchic society from the past, which thwarted Poland’s development.

Aren’t you afraid that Poland will follow the same model as the US, where income and wealth disparity is already causing social unrest?

The Anglo-Saxon model has failed in the last 40 years. Despite an overall pretty good economic growth track record, the US has failed the majority of Americans, whose real incomes have hardly increased since the late 1970s. The bulk of additional GDP has accrued to the elites of the society. The poor were left behind. That is also the case for the UK, much less for continental Europe.

In Poland, since 1989, all segments of Polish society have seen their income increase faster than in G7

 

countries. No other country has achieved that. In Slovakia and the Czech Republic, for instance, the income for the bottom 10-20 percent has grown slower than in the West. And while Poland could have been much more inclusive, it has nonetheless won the top rank for inclusiveness among all democratic post-communist countries.

It’s crucial for Poland to continue on this path and keep inequalities in check, to ensure that everyone in society remains socially mobile, meaning they have a real chance to actually make it, unlike in the US, where the chances of advancing to a higher social stratum are extremely low and your income is largely determined by who your parents are. In Poland, your name, where you’re from, what social sphere you belong to – they do determine your future, of course, but still less than elsewhere. We need to keep it this way. The “American dream” does not exist anymore. If anything, there is the Swedish, Danish and yes, even the Polish dream.

How do we keep inequality levels in check?

We need a set of policies, some of them implemented by the otherwise derided Kaczyński administration, that include progressive taxes, high minimum wages, and wide ownership of capital through, for instance, employee stock ownership plans. We also need to continue to provide direct support for the poor, including with the 500+ family support program. This is a good investment into social cohesion and mobility.

Another good way to ensure that we have a level playing field for everyone is to provide access to roughly the same public services to everyone: good quality early education, schools and universities, healthcare and infrastructure. It is in the interest of the new Polish elites to ensure the poorest also partake in the benefits of economic growth. Better to be penny wise now and eliminate poverty at a low cost than pound foolish later when inequalities turn into a political crisis and growth-damaging economic policies.

Do you think we may witness another social upheaval somewhere in the world over the next couple of decades?

Yes, I believe so. In some places it is inevitable. Historically, other than in times of great wars, returns on capital exceeded the pace of economic growth. This implies that the global 1 percent will continue to get richer faster than the rest of the society. Let’s just look at how Trump lowered taxes for the richest Americans, solidifying their privileged position and pushing America another step closer to an extractive society. I hope there won’t be any violence, even though the historical track record suggests otherwise, but at some point you will see populists come in and take the system apart.

Do you think that the widespread automation which we are already witnessing will quicken the growth of disparities by eliminating a lot of lower-paid jobs and if so, is there a way to somehow cushion societies from it?

If a pickpocket steals someone’s wallet, do you punish the pickpocket’s hand or the person? Automation is not to blame for creating inequalities, it is the governments that let it happen by not providing a safety net for society. I get frustrated when people say that it’s nobody’s fault. That it’s the technology and automation that are responsible for what is happening in the US, for Trump becoming president. I disagree. This is just the hand of the pickpocket. We allowed this to happen.

We did not allow for disparities to grow this much between 1945 and 1975, when incomes of Western societies increased even at a faster rate. But then during the Reagan administration something fundamental changed, and since then the median American stopped becoming richer.

Automation poses a risk and it’s the responsibility of the policymakers to deal with it so that we can all benefit from automation, not just the top 1 percent. It will have an impact and it will increase inequality. We should be ready with the right response when it happens.

 

What does the future hold for the region? How long will the “Golden Age” continue?

The Golden Age will continue because Poland is inclusive, but also because it is still super competitive owing to its high quality of human capital, attractive level of wages, open borders, improving infrastructure and stable macroeconomic policies, as well as a lot of scope for increasing productivity. After all, Poland’s productivity is now only slightly above half of what it is in Germany. We can continue to borrow technology and ideas from the West and there is still a lot of room for growth. Barring a war, a global crisis or a collapse of the EU, by 2030 Poles should earn about 80 percent of the average wage in the euro zone, adjusting for purchasing power. I think that’s achievable and realistic given the speed of convergence over the last 25 years.

What happens then?

That’s when Poland and the rest of the region will start to have fundamental growth problems stemming from demographics, institutions and innovation. Demographics is already a problem, but it will really hit Poland closer to 2030. Poland needs to further promote good family policies and open up to smart immigration, which means not opening up to just anyone who wants to come, but to those that can provide value to the Polish economy and society. The best way to attract high-value immigrants is through the university system: highly skilled young people who come here to get educated and stay here. Instead of a defeatist fight not to allow the Polish society to shrink, we should be bold and set ourselves a target of actually increasing the size of the population. Targeting a 50 million strong population in 2050 might be a long shot, but it would help concentrate minds. The best defense is a good offense.

Secondly, the quality of institutions. Since 1989, we have absorbed Western institutions, culture and values to an extent never experienced before. These made the Polish economic success possible. We
now need to make sure we don’t damage these newly built institutions, a risk that is particularly relevant now. If you destroy trust in the Constitutional Tribunal and in the legal system when you create cracks in various institutions, consequences won’t become apparent overnight, but they will come later and undermine development. Undermining institutions is like smoking: the daily damage is not seen, but when you get cancer, it is already too late. Gordon Brown, former prime minister of the UK, once said that “in establishing the rule of law, the first five centuries are always the hardest”. Poland had only 25 years of building institutions and can’t afford to undermine them.

Do you think Poland has the potential to be at the forefront of innovation one day?

Yes, although not soon. We don’t need Polish Googles yet, although of course they would be warmly welcomed. The productivity gap is still so large that we can grow by absorbing technologies for another decade and a half. That said, we should invest in innovation now, because it takes time to build innovation capacity. Being at the forefront of world innovation is very difficult. Only a handful of countries have managed to do that: apart from the West, there’s Japan, South Korea and increasingly China. It’s a long process. You can’t train to run a marathon overnight if you don’t want to kill yourself. You need to train systematically, invest in skills you never really had. This is especially relevant for Poland and CEE that arguably have no innovation in their DNA. The few lonely Poles who came up with innovative solutions in the past, hardly ever commercialized them. We need to learn it now.

To innovate more, we need to modernize public support. There has been much progress, which I witnessed first-hand, but the whole support system is still often bureaucratic, slow and unfriendly to the business sector. We also need to improve education. After all, innovation comes from people’s brains, not from AIs. We already produce a lot of great brains, but we need to produce more of them and we need to ensure that we use them well. Lastly, we also need to open up to the world. We will not achieve innovative breakthroughs in a monoglot, insular and nationalistic environment.

Overall, to become as rich as the West for the first time ever, we will need to become competitive not because we are cheap, but because we are as good as the others. And we are still far from it. Robert Lewandowski made it big not because he earns less – he actually earns more than other players –
but because he is just as professional as his peers. By 2030, Poland will have to be a country full of Lewandowskis to truly succeed.


Marcin Piatkowski, Ph.D., is a Visiting Scholar at Harvard University’s Center for European Studies (2016-2017), Senior Economist at the World Bank in China, and Assistant Professor at Kozminski University in Warsaw. He is the author of a new book: “Europe’s Growth Champion: Insights from the Economic Rise of Poland,” published by Oxford University Press in 2018.

In his free time, he enjoys running marathons, participating in triathlons, reading and dancing.

Follow his tweets at @mmpiatkowski.

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